Firm Size as Moderator to Leverage-Performance Relation: An Emerging Market Review

Abstract

Present study explored leverage-performance relation while the moderating firm size in developing countries like Pakistan. Data is collected for 304 Pakistani non-financial firms for the period of 2005-2013. It is found that overall leverage-performance relation is negative for all types of firms. However, such losses are more prominent for small size firms. Results also showed that the leverage-performance relation is nonlinear for medium and large size firms.However, in practice these firms are not targeting optimal level and over-leveraging that ultimately decrease their profits.So, financial managers of small size firms should avoid debt financing while for large and medium size firms,managers need to adjust their debt ratio toits optimal level.

Keywords: Leverage, Performance, Capital Structure, Moderation, Firm Size

JEL code: G320